Identifying Efficiently and Economically Operated Hospitals: The Prospects and Pitfalls of Applying Frontier Regression Techniques

This article examines whether policy makers can make immediate use of recently developed frontier regression techniques to identify efficient hospitals primarily for rate setting purposes. This new approach is applied to data on Florida hospitals for the period 1982–1993 to appraise how well it performs in gauging variations in hospital costs and efficiency. This appraisal suggests that frontier methods are quite promising, but that they may not yield sufficiently unambiguous results to serve the short-term needs of hospital regulators interested in scaling reimbursement rates to the efficiency with which hospitals deliver services. Other policy-relevant strengths and weaknesses of frontier techniques are also discussed.